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Higher focus on cash collection

Three takeaways from Insecticides India’s Q2FY21 earnings: (1) Uneven rainfall and less pest infestation resulted in revenue decline of 9.4%. Branded products revenue declined 15%. Higher focus on cash collections also impacted revenue growth, (2) company has reduced net working capital days to 115 at H1FY21-end vs 184 at FY20-end. The company has also repaid its entire debt with better cash collections and (3) EBITDA margin declined 170bps YoY due to inferior product mix and negative operating leverage. We remain positive on Insecticides due to (1) steady launches of high-margin products, (2) removal of generic products from the portfolio and (3) backward integration of technical. The stock is trading close to 1-year forward ‘mean P/E - 1SD’. Return ratios are above cost of capital. Maintain BUY with a target price of Rs535 (9x FY22E, Earlier TP-Rs560).

* Q2FY21 result: Revenue, EBITDA and PAT declined 9.4%, 19.8% and 15.1%, respectively. Gross and EBITDA margin contracted 60bps and 170bps, respectively. Due to uneven rainfall and less pest infestation, revenues declined. Due to change in revenue mix (higher decline in premium products) and negative operating leverage, the EBITDA margin contracted.

* Segment-wise performance: Sales of branded products declined 15% YoY. While Maharatna product revenues declined 4%, revenues of other branded products decreased 25%, YoY. Institutional sales and exports reported revenue growth of 7.4% and 24.4%, respectively, in H1FY21 over H1FY20. B2C revenues declined 2.4%. The revenue contribution of products launched FY13 onwards (i.e. Freshness index) was 37% during H1FY21.

* Higher focus on cash collections: The company has focussed on reducing the investments in net working capital and higher cash collection during the quarter. Net working capital of the company now stands at 115 compared to 184 at the end of FY20. With higher cash collections, the company has repaid its entire debt now.

* Aggressive new product launches to drive growth: The company plans to launch new products to drive growth in H2FY21 and FY22. It has introduced Dominant (Dinotefuran 20% SG) insecticide during the quarter. It has also introduced two new products as Master stroke and Mahir during the quarter. It has planned three products (Lethal granules, Tadaki and Supremo) to replace Thimet.

* Maintain BUY: We model Insecticides to report revenue and PAT CAGRs of 7.3% and 21.1%, respectively, over FY20-FY22E. Return ratios are also expected to improve over the same timeframe. We retain our BUY rating on the stock with a DCF-based target price of Rs535 (9x FY22E). The stock is trading close to its 1-year forward ‘Mean P/E - 1SD’. Key risk: Weaker-than-expected performance of new product launches.

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